Megafon, the Russian telecommunications company that listed on the London Stock Exchange a fortnight ago, faced a battle in the press running up to the deal that could have cost it up to 15% of its value.

Negative coverage ranged from concerns over corporate governance to the dragging up of past Russian failures. But the deal breathed life into the London IPO market at a time of dire dealflow, leading non-executive director Paul Myners to speak of London’s “arrogant stance” towards overseas listings. Megafon is trading above its offer price, leaving bankers scratching their heads over what exactly justified the negative coverage.

One banker on the deal said: “I can’t believe the deal got so much negative publicity. It was a success. It priced in the range, albeit on the low side. It had a good quality book of demand, dominated by Anglo-Saxon investors. It was included in the passive indices, and yet, still people are negative. Frankly, I’m struggling.”

Media glare

The conclusion from investment bankers about how press coverage affects an initial public offering is revealing. Journalists care a lot about governance and not enough about fundamentals, and no amount of bad headlines can derail a good firm coming to market, bankers say.

One head of equity capital markets for a US bank said: “A good company, even if it has bad press, will execute a fine IPO. And a poor company, even if they get great press, it won’t work.”

Few bankers were willing to publicly criticise the efforts of the fourth estate in analysing deals. However, Megafon’s listing provides a useful case study in how, if at all, press coverage can influence an IPO.

Megafon is almost the perfect example of how the build-up to an IPO can turn sour. Goldman Sachs, one of the lead banks on the deal, pulled out in October because of concerns about the ownership structure of Megafon, according to several sources on the deal. Goldman’s move further fuelled the media’s speculation about the company.

Megafon also underwent a corporate restructuring during the listing process, and coverage focused on majority owner Alisher Usmanov, Russia’s richest man, who spent six years in an Uzbek prison in the 1980s for a conviction for fraud and embezzlement. His conviction was overturned in 1989.

One banker on the deal said: “It was not the ideal background.”

In the face of these public relations nightmares, the investment banks on the deal eventually distributed $1.7bn in Megafon shares, making it the second-largest IPO of the year in Europe, the Middle East and Africa. The deal valued the company at $11.1bn. It was the largest IPO in Russia since 2010, and the second-largest European telecoms IPO since 2008. The IPO priced at $20, and was trading 8.25% up at $21.65 last week.

One equity capital markets banker on the deal said: “On Megafon, the press coverage made absolutely no difference, because all the funds anchoring the deal had done their fundamental work.”

However, the deal raised less than the $2.1bn originally hoped for, and not everyone working on it believed that the negative press coverage had been inconsequential. One banker on the deal said: “The headlines around the governance issue probably cost the IPO around 10% to 15% of market value.”

IPOs are sensitive processes, and firms are often not used to the glare of the media spotlight. Even a chief executive’s dress sense is up for scrutiny. After Facebook founder Mark Zuckerberg appeared at an IPO investor meeting in a trademark hoodie, he was immediately criticised by analysts and his sartorial choice made countless headlines.

Even among the investment banks, bad headlines can cause a stir. When Goldman Sachs pulled out of the Megafon deal, the bankers that remained were “very twitchy”, according to a person close to Megafon.

Anti-fundamental

Several bankers also complained that journalists too often focus on governance rather than the fundamentals of the company. One head of equity capital markets said: “On social media, and real estate, everybody has a view. But I have rarely worked on a deal on an industrial company, for example, where the press talks about [the fundamentals].”

One banker on the Megafon deal said: “I have been disappointed that very few articles focused on the business case of Megafon. In Russia you don’t have many of these companies that deliver both growth and dividends. This point has been overlooked by a number of publications.”

One US investment banker also took a dig at some of the UK asset managers for expressing opinions about forthcoming IPOs. He said: “In my opinion, a lot of the commentary that makes its way into the press is from a handful of quite well-known fund managers who like to talk. The great irony around those people is that they are rarely present in the IPOs they talk about and, if they are present, they are very small.”

However, these comments can have a lasting effect. He said: “The UK long-only managers talk to each other a lot, and that sentiment impacts appetite of other core UK investors more than the press chatter.”
Michael Lavelle, head of capital markets origination for Europe, the Middle East and Africa at Citigroup, said: “The press are commentators, we are commentators. What it comes down to is companies doing what they say they are going to do. Performance and success over time is not going to be driven by what the press or banks say, but what the companies do.”

And those who help manage and invest in IPOs that get pasted in the press can always hark back to Google, which listed in 2004. At the time, one major media outlet said: “The rich price tag being hung on Google’s initial public offering has many financial advisers steering their clients away from the deal, turning off some of the very investors the web search giant had hoped to attract.”